Fundamental analysis involves studying the parity or difference between the current
market price a company's stock and the company's own intrinsic present or future
worth based on its assets and competitive strengths. There are three approaches
to fundamental analysis:

Anticipative valuation

Absolute valuation

Anticipative valuation:

This approach is based on the assumption that the current price a company's stock
reflects the true value of its issuing company and figuring out whether it would
be worth more or less in future.

To do this one has to sift through accounting statements of a company to ascertain
financial strengths and weaknesses, finding out competitiveness of the company on
various parameters including technology, quality, marketing and funds, checking
out trends in the industry the company operates in and then figuring where the company
is headed depending on the past trends and present status. If one concludes that
the value of the stock will go up in future, one buys and if it is going to go down,
one sells.

To take an example, Hindalco is a company in the business of producing commodity
aluminum as well as products extruded from that. Currently the company's stock is
hovering around Rs 700. Given that Hindalco will make more money if the prices of
aluminum were to rise, one would track the global aluminum prices on London Metal
Exchange, LME, and also check with industry participants about demand-supply trends
and possibility of prices hardening. If one believed that aluminum prices would
go up and the market was not adding that to the stock's value right now, one would
buy Hindalco stock.

Absolute valuation:

This approach gained its fame and notoriety in India thanks to Harshad Mehta. It
is also known as the replacement value method. However, the method is applied by
many to companies operating in capital intensive areas where the biggest barrier
to entry is size of the capital. Such companies are largely commodity producers
like Hindalco.

If one was to value Hindalco stock's fair price based on this method, one could
arrive at a figure of about Rs 1000 compared with its current price of about Rs
700. For example, the 242,000 tonnes per annum smelting capacity of Hindalco could
take about Rs 5000 crore to set up now, replicating its 620 MW power capacity could
cost about Rs 2500 crore and its 74% stake in another aluminum company, Indal, would
be worth about Rs 265 crore given than Indal stock has been trading at about Rs
70. So, based on absolute valuation or replacement value approach one would again
buy Hindalco stock.